Investment-Cash Flow Sensitivity for Swedish Firms

Abstract: The aim of this bachelor thesis is to determine whether there exists a relationship between a firm's level of overinvestment or underinvestment and its level of positive free cash flow or negative free cash flow respectively. We collect data from 165 Swedish firms listed on OMX Stockholm Stock Exchange between 2008-2014. Contrary to previous studies on U.S. data, our results indicate no relationship between a firm's level of overinvestment (underinvestment) and its level of positive (negative) free cash flow. While such a relationship cannot be established, we are able to show that a firm's level of cash flow from assets in place has a positive relation with its level of new investment. Our results thus indicate that investments increase with internal funds, suggesting that there are either financing constraints in place restricting the firm's investment level when internal funds are missing or that agency problems give rise to wasteful spending as internal funds rise or both.